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Loblaw to Create Real Estate Investment Trust

Canadian grocer hopes to 'unlock value' for shareholders

December 5, 2012, 07:00 pm

Loblaw Cos. Ltd. has revealed that it will create a real estate investment trust (REIT) – one of the largest in Canada -- to acquire a considerable portion of the Brampton, Ontario-based grocer’s real estate assets and sell units of the trust through an initial public offering (IPO).

Loblaw estimates that it will initially contribute real estate with a current market value of more than CAN $7 billion (US $7.06 billion) to the REIT, and intends to retain a significant majority interest. The IPO is expected to be completed in mid-2013, subject to prevailing market conditions and regulatory approvals.

The aim of the trust, according to Loblaw, is to provide value for its shareholders, create a stand-alone real estate-focused vehicle to maximize the value of the company’s real estate portfolio, and reduce the cost of capital for real estate and ramped-up store development projects.

“The creation of the REIT is expected to build long-term value both for Loblaw and the REIT,” explained Loblaw executive chairman Galen G. Weston. “This strategic initiative positions Loblaw’s core businesses well for the future. We expect the REIT to not only unlock value for our shareholders, but also increase our financial capacity to pay down debt, buy back shares, and create a long-term source of capital to invest and grow.”

Continued Weston: “The REIT … builds on our longstanding commitment to owning and developing quality real estate. It will be a vehicle to manage and enhance our real estate portfolio with the potential for future expansion through incremental vending in of our own real estate and external investment opportunities.”

Loblaw’s real estate portfolio encompasses an estimated 47 million square feet with a current estimated market value of CAN $9 billion (US $9.08 billion) to CAN $10 billion (US $10.09 billion). Under the transaction, the grocer will contribute about 35 million square feet to the REIT, and will enter into long-term lease arrangements with the REIT on those properties. The contributed real estate portfolio will be mainly focused on retail, consisting of a geographically diverse mix of stores and shopping centers, as well as warehouses and office buildings.

Loblaw anticipates that as a stand-alone entity, the REIT will benefit from a lower cost of capital, which will aid its development and expansion. Growth will also arise from the company’s contribution of further properties over time, along with opportunities outside of the grocer’s footprint. The REIT will have its own management team to oversee the contributed properties and increase the portfolio, while Loblaw will offer support and various services.

The company expects to consolidate the REIT’s financial results for financial reporting purposes and believes that its consolidated profitability will be minimally affected. The proposed transaction isn’t expected to alter Loblaw’s investment grade credit rating.

A subsidiary of George Weston Ltd., Loblaw is Canada’s largest food retailer and one of the biggest private-sector employers in that country, with more than 1,000 corporate and franchised stores employing 135,000-plus full-time and part-time associates.